The specter of global warming gave those who had the predisposition a case for a national policy promoting wind energy. The argument goes like this: Because fossil fuel increases carbon dioxide accumulation in the atmosphere, and because carbon dioxide accumulation heats up the planet, and because a hotter planet will lead to all kinds of catastrophes, it is urgent we check the use of fossil fuel by promoting the use of alternative green energy.
I have no particular expertise in long-term climate patterns. I do have an innate suspicion about claims and counter-claims by any and all who have financial or ideological interests in the policy implications that flow from those claims. So I am both a skeptic of global warming and a skeptic of skeptics of global warming.
But my opinions are not relevant. As an economist, however, I can claim actual expertise in what is called Externality Theory.
Most all recognize that markets work superbly when buyers and sellers bear the costs and obtain the benefits of the transactions. If a teenager is offered $8 an hour to help a homeowner clean up the yard and he accepts the offer, we surmise the teen is better off and the homeowner is better off. Bully good for both of them.
But not all transactions are so neatly confined to the buyer and seller. If energy consumers buy electricity from a power company that burns coal, and the coal soot harms the health of people not party to the electricity sale, there is an external cost imposed on those third parties. It is becoming obvious here in Indiana that wind farms impose such external costs.
In my county, neighbors of a proposed wind farm showed up en masse to protest its construction. It seems wind farms are noisy, and in the winter they can project dangerous ice shards toward nearby residences, not to mention acting as giant Cuisinarts for hapless birds. So an obvious question becomes what are the external costs of wind energy from a given Hoosier wind project compared with an alternative method of generating the electricity (which, by the way, may not be coal)?
Market prices reveal something about costs. If that teen worker accepts the $8-an-hour wage from the homeowner, we can be pretty sure this is a reliable indication of the alternative use of the teen’s time.
The problem with external costs is that, by definition, there is no market for them — they are external to the market. It is easy to identify the existence of external costs such as coal soot and wind-farm noise. It is devilishly difficult to accurately gauge their magnitude.
That is not to say that people don’t try. But we can be pretty sure that those with a dog in the race are prone to exaggerate or minimize the magnitude of the external costs. We should not go so far as to pay no attention to estimates of external costs — but let’s consider them all with a grain of salt.